Construction Law Newsfeed
The Best Construction Job
By: Stephen D. Harrison
Featured in Construction News magazine
“The best construction job I ever had,” a client once told me, “was the bid I missed. If I would have been awarded that contract, I probably wouldn’t be here today.” With the fierce competition required to maintain adequate workloads, contractors sometimes fight hard for projects from which they should be running. I am still amazed when a client considers a bid protest, after finishing a bad project with the same unreasonable owner. Once, after asking a client why he contracted with a party we had previously sued, the client confessed, “I just needed to dance with the devil one more time.” These things amaze me.
I admire my contractor clients for their entrepreneurial spirit. Contractors are truly one of the last vintages of old time business entrepreneurs. With hard work, skill, integrity, along with plain old business sense, contractors often start with sweat equity, and build business empires. Their success is attributable to being comfortable with risks. Successful contractors appropriately transfer, insure against, or develop the checks and balances necessary to assume, the risks which conservative businessmen would not take. These qualities must be admired.
Too often, however, contractors succumb to their competitive instincts and take a job at any cost. To remain successful in changing times contractors must resist this temptation. The most successful of my construction clients use discipline in their approach to risks. Most of my knowledge about proper discipline and management of risks has been instilled by working with these successful men. So without taking credit for the origin of these rules, I recommend that contractors, in all specialties of the construction industry, adopt the following Disciplinary Rules to miss the wrong jobs.
Know the other contracting party. This seems obvious, but is overlooked more times than not. A contractor must know the entity which owes the payment obligation. A contractor may be negotiating with a well-known Fortune 500 company, but be contracting with an empty limited partnership. The limited partnership usually will have no assets outside the land itself. The construction lender will have the first lien on the land itself. The contractor’s rights to collect payment will be limited to a company whose only asset was foreclosed by the lender. Simply, if the contract is with a party without available assets, rights to payment cannot be enforced. By obtaining guaranties from financially solvent, interested parties, a contractor can mitigate the risks of non-payment. The construction lender will have obtained these guaranties from the related interested parties. Unlike the contractor, however, the construction lender also has a first lien on the assets of the limited company. Only the contractor is expected to advance money without security. If the contracting party is a public entity, the contract must know its reputation for paying or delaying payments, or for failing to pay retainages.
In addition to the financial conditions of the contracting party, a contractor should also know the contracting party’s fairness. The contracting party should reasonably manage changed conditions, promptly make decisions, and timely resolve controversies that are inherent in the construction process.
Read the contract. A contractor must know the risks that are assumed by the contract provisions. If the contractor waives its right to changed conditions, or agrees to assume the responsibility for finding underground utilities, testing for soil conditions, or measuring all existing dimensions prior to construction, the contractor will not be paid for these costs as extra work. A contractor will not be entitled to payment for rock that was not disclosed in the soils report, or for changes required because the planned dimensions did not fit the existing field conditions. To avoid catastrophic risks, a contractor must first read the contract and know the risks presented.
Price the risk assumed. If the construction project includes extreme risks, either because of the construction requirements or because of the contractual requirements, the contractor must include the cost of these risks in the price. Some of these risks can be covered by insurance, and the price of that insurance must be included in the contract amount. Some of these risks can be assumed by additional management or manpower, but these costs must also be included. The contractor must make sure that the rewards of the contract are worth the risk assumed. If a contractor fails to price these risks, eventually the costs of the risks will exceed any money accumulated from beating the odds on prior projects. I am often told, “If I included all the risks of this project in the price, I would never get the job.” That is sometimes true. And sometimes, the best job you ever had, was the one you missed.
Know the design professional controlling the work. Many of the design professionals in Texas are known for their integrity and the quality of their work. There are a few design professionals, however, who are the “golden goose” for lawyers. Although these professionals generate work for lawyers, lawyers dread cases involving inadequate plans, delays and numerous change orders. Inevitably, all parties lose when plans are bad or the design is deficient. A contractor must know the quality of the plans that govern the construction. If the plans are bad, there will be costly changes and delays. Owners are not receptive to paying large amounts for change orders that do not enhance the project’s function or quality. If the owner is merely obtaining what he thought he was getting at the original contract price, he won’t want to pay for change orders. Further compounding the contractor’s problem, an owner usually will attempt to mitigate damages arising from inadequate plans at the contractor’s expense. Contractors must either avoid construction involving bad plans, or adequately price the substantial costs of these risks.
In addition to the adequacy of the plans, a contractor should know the design professional’s reputation for (i) timely responding to requests for information, (ii) providing remedies when the unexpected occurs, (iii) reasonably handling change orders when change conditions occur, (iv) considering alternatives or substitutions that provide the same or enhanced qualities, and (v) not requiring construction at a quality level exceeding the requirements of the contract documents.
Recognize a niche. The construction industry is broad. Most contractors have a competitive advantage in at least one particular specialty. A contractor’s competitive advantage may arise out of special knowledge or experience, developed business relationships, special talents developed in a work force or a unique reputation in a specialized area. A successful contractor recognizes its competitive advantage in a unique market. That contractor will capitalize on higher profit margins available in the niche market because of this competitive advantage. A contractor must therefore evaluate past successful experiences, business relationships, and the unique qualities of its management and work force, to recognize and develop a particular niche. The contractor must then capitalize on the opportunities presented in this niche area. There may be wisdom to some diversification, to avoid economic down turns in a specialty area. A successful contractor will, however, continue to seek and develop opportunities in the specialties in which the company has succeeded in the past.
Appreciate and educate employees. Contractors are primarily providing a service to their customers. The quality of this service depends upon the quality of the contractor’s work force. Although the CEO will provide direction and inspiration for the company, the company’s success is still dependent upon the performance delivered by the entire team. Successful construction companies appreciate and nurture their work force. Part of that nurturing includes the desire to continuously improve and educate the employees that are the company. Education and training is a continuous process. Therefore, a contractor can never be satisfied with the status quo, even when it is good. A contractor must continuously invest in the education, training and improvement of your work force.
Use moderation in growth. Seldom do things remain unchanged. A construction company is either growing or declining. Moderate growth is a characteristic of a healthy construction company. Growth provides the opportunities needed for maturing and improving the work force. If these opportunities are missing, the most talented of the work force will seek these opportunities in other companies. Moderate growth is therefore healthy as long as it is planned, controlled, and continues to provide a profit that corresponds with the risks assumed.
Conversely, sometimes rapid growth will devastate a good company. Rapid growth assures undue pressures on operating capital. Rapid growth also encompasses additional risks associated with (i) acquiring large volumes of work outside the experience of the company, (ii) acquiring work with little or no profit margin, accompanied by extreme risks, (iii) having to employ too many new workers, without adequate knowledge or training in their particular skills, and (iv) over-taxing limited management and control systems designed for a smaller volume of work. A contractor can avoid the catastrophic results of these risks by planning a healthy, moderate growth for your construction company.
Having exhausted the wisdom I have learned from successful contractors, I recommend you learn directly from the masters of risk management, other successful contractors.